Silver Lining Hard to Find in Ross Speech
- *Silver Lining Hard to Find in Ross Speech*
*By Tom Murphy
*WardsAuto.com, Jun 10, 2008 9:00 AM
DETROIT � Attendees at last week's Ward's Auto Interiors Show may have hoped
for words of encouragement from billionaire investor Wilbur Ross Jr., but
they found no silver lining in his keynote speech.
A dedicated student of economics who uses a vast array of financial
indicators to guide his acquisitions of companies in various manufacturing
sectors, Ross began his speech by talking about the fundamental problems
facing the U.S. economy � and the auto industry, in particular, which has
struggled through three bad years in a row.
The chairman and CEO of W.L. Ross & Co. LLC quoted a litany of economic
statistics that left the crowd depressed, if not alarmed.
"Unfortunately, next year may be even more challenging," says Ross, founder
of International Automotive Components Group, a supplier of interior trim.
"Why am I pessimistic? After dropping by 400,000 units in each of 2006 and
2007, sales are likely to go down by more than 1 million units this year,
and the mix will continue to move toward the small cars and away from
pickups and SUVs," Ross says.
In 2007, light-vehicle sales in the U.S. totaled 16 million units, down from
16.5 million in 2006, according to *Ward's* data.
"Our automobile market is the most highly saturated in the world, with three
cars for every four people of driving age," Ross says. "When you eliminate
those without licenses � the indigent, the physically or mentally impaired
and those in prison � you have practically one car for every actual driver.
It is essentially a replacement market."
*"The American consumer is both tapped out and burned out," Wilbur Ross
And fewer people are replacing their vehicles as they lose their jobs,
retire early or cope with stagnant wages or even pay cuts.
"Median per-capita income has stalled at about $61,000 for the last five
years, putting middle America under severe economic pressure," Ross says.
People have been borrowing to support a higher standard of living, but that
trend, ironically, has had disastrous consequences as consumers have
defaulted on loans, sparking the credit crunch.
Household debt has increased from $9.5 trillion in 2003 to $13.8 trillion in
2007, Ross says.
"We actually had a recent year when our nation spent more than we earned, so
we had dis-saving for the first time since the Great Depression," he says.
"It's not a sustainable phenomenon."
In 2006, Americans remortgaging their homes extracted close to $350 billion
in the transactions at a time when those properties were losing value.
"Last year was the first time since the Depression when housing prices fell
nationwide," Ross says, adding that home prices have dropped by 14.1% in the
last 12 months and, since the 2006 peak, are down 16%.
"This has reduced the population's net worth by $3.68 trillion, thereby
causing at least a $138 billion decline in consumer spending," he says.
The worst may lie ahead. Mortgage delinquencies and foreclosures continue to
rise, and the Congressional Budget Office says home values must fall by
another 15% to achieve the historical relationship between sale values and
rental values, Ross says.
"Even without that decline, Moody's estimates 10.6 million families will
have negative equity in their homes by June 30," he says.
And first-time buyers may have to wait longer for the American Dream, as 90%
of banks are tightening mortgage-lending standards, Ross says.
"In April, sales of new homes dropped to 526,000 from 913,000 units a year
earlier, and new housing permits fell from 1,457,000 to 978,000," he says.
Car loans also are getting more expensive. "The duration of financing has
gone from an average of 57 months five years ago to 64 months now, and some
manufacturers are considering as long as 80 months," Ross says.
In February, 26.7% of all cars being turned in had negative equity averaging
$4,342. "So the balance owed on the new car was more than the purchase
price," he says. "Even harder hit were SUVs, 36% of which had negative
equity and light trucks at 40%."
In the big picture, the same consumer distressed by falling home prices also
has a disincentive to buy a new car now, he says.
On the sore topic of fuel prices, Ross says consumers must brace themselves
to pay $4.75 per gallon in the near future.
"For a typical family, this would cost something over $200 per month.
Meanwhile, consumers are also paying more for home heating, food and their
staples," he says.
With oil priced early last week at $125 per barrel, "Americans are spending
a terrifying $105 million per hour, 24 hours per day, 365 days a year," Ross
says. He points to a Goldman Sachs forecast that oil will hit $200 per
"If they prove to be correct, the effect on consumers in general and on car
sales, in particular, would be devastating," he says. "Already people are
using more mass transit and carpooling and scheduling fewer trips in order
to save money." In March, miles driven dropped by 4% � "a very rare
occurrence," Ross says.
In the first four months of 2008, Americans spent $158 billion on gasoline,
double the level during the same period five years ago, he says. "We spend
3.7% of our disposable income on transportation fuel."
"The bottom line is that the American consumer is both tapped out and burned
out," he says. "Consumer confidence is at a 28-year low, and 81% of adult
Americans polled believe we are in a recession."
Ross says he believes a recession will not be official for another six
months. "But I believe it already has started and that we are in for at
least a year of stagflation or worse," he says.
Ross questions the value of President Bush's economic-stimulus package,
which is giving $600 each to eligible Americans this summer, and $300 for
each eligible child under 17. "A one-time rebate of a few hundred dollars is
hardly a reason to buy a $20,000+ car," he says.
Despite his downbeat message, Ross, 70, managed to deliver the barrage of
statistics not as a lecture or sermon, but in a calm, patriarchal tone, as
if it were dinner conversation.
He told the story of a recent discussion with a French economist who called
Americans "energy pigs."
Ross asked for an explanation, and the economist asked what temperature he
keeps his office. Ross said about 68� in summer and 72� in winter.
"He said, 'See if you would keep it at 68� in winter and 72� in summer,
you'd save umpteen zillion barrels of oil.'"
Ross concedes the economist is probably right, although he's not sure how
soon he will adjust his thermostat. "At some point, people's behavior will
change," he says. "Lights will tend to get turned off when people leave the
room. There's a lot of things we can do to make a change."
-Charles C. Primas
Save on travel and travel related services at: http://cprim72.travelfhtm.com
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